FIMA 40023 Security Analysis Finals

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
College of Accountancy and Finance Student Council

CAF Review
FIMA 40023: Security Analysis (Final Examinations)
I. TRUE OR FALSE
1. DDM is widely used throughout finance for pricing risky securities and generating
expected returns for assets given the risk of those assets and cost of capital.
2. One of the most popular relative valuation multiples is the price-to-earnings (P/E) ratio.
3. Promissory notes are more formal than bonds.
4. The value of the bonds is equal to the present value of future cash flows that an investor
may expect from the bond, discounted at their desired rate of return.
5. Financial statements are required by law.
6. The cash flow statement also takes into account some non-cash accounting items such as
depreciation.
7. Footnotes are the “arteries” that keep everything connected in financial statement.
8. The value of any financial asset is the present value of the expected cash flows.
9. Stock dividends entails reduction in the resources of the company.
10. A mix of assets provides balance and protects against risk.
11. The Notes to the Financial Statements list the important information that could not be
included in the actual ledgers.
12. If the value obtained from the dividend discount model is lower than the current trading
price of shares, then the stock is undervalued and qualifies for a buy.
13. The annual exercise of rebalancing allows the investor to capture gains and expand the
opportunity for growth in high potential sectors while keeping the portfolio aligned with
the original risk/return profile.
14. A completely transparent market is highly efficient.
15. Active management is a set-it-and-forget-it long-term strategy.
II. MULTIPLE CHOICE
1. Which of these is NOT a key element of portfolio management:

A. Asset Allocation
B. Convertible
C. Rebalancing
D. Diversification
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2. ___________ generally involves selling high-priced securities and putting that money to
work in lower-priced and out-of-favor securities.
A. Asset Allocation
B. Convertible
C. Rebalancing
D. Diversification
3. Which of these is/are characteristics of a good market:

I. Transparent
II. Liquid
III. Efficiency
IV. Internal Efficiency
A. I only
B. II and III
C. I, II, IV
D. I, II, III, and IV
4. Which of these is/are components of bonds:

A. Face Value
B. Coupon rate
C. Maturity date
D. All of these
5. It lists all the assets held by a company in addition to the portion of those assets that are
financed by debt or equity.
A. Statement of Comprehensive Income
B. Statement of Cash Flows
C. Statement of Financial Position
D. Notes to the Financial Statements
6. ___________ is commonly referred to as indexing or index investing.

A. Passive Management
B. Portfolio Management
C. Active Management
D. Asset Management
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7. _______________ is the art and science of selecting and overseeing a group of investments
that meet the long-term financial objectives and risk tolerance of a client, a company, or an
institution.
A. Passive Management
C. Active Management
D. Asset Management
8. ____________ aims to duplicate the return of a particular market index or benchmark

A. Passive Portfolio Management
C. Active Portfolio Management
D. Asset Portfolio Management
9. STATEMENT 1: Book Value of Stocks is the amount of net assets that a corporation has
for every share outstanding of its common stock.
STATEMENT 2: Stock Dividends is the earnings distribution in the form of shares of
capital stock.
A. Only Statement 1 is true
B. Only Statement 2 is true
C. Both statements are true
D. Both statements are false
10. STATEMENT 1: Cash flow shows us how the company has performed in managing
inflows and outflows of cash.
STATEMENT 2: Income Statements provides a sharper picture of the company's ability
to pay bills, creditors, and finance growth.
11. STATEMENT 1: Horizontal analysis compares data horizontally, by analyzing values of

line items across two or more years.
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STATEMENT 2: Vertical analysis looks at the vertical affects line items have on other
parts of the business and also the business’s proportions.
12. STATEMENT 1: When bonds are sold for lower than face value, the difference is called
the bond premium.
STATEMENT 2: When bonds are sold for higher than face value, the difference is called
a bond discount.
13. STATEMENT 1: A bond issuer has to determine the value of the bonds - the price at
which investors would be willing to buy the bonds.
STATEMENT 2: The value of the bonds is equal to the present value of future cash flows
that an investor may expect from the bond, discounted at their desired rate of return.
B. Both statements are true
C. Only Statement 1 is true
14. STATEMENT 1: The management fees assessed on passive portfolios or funds are
typically far lower than active management strategies.
STATEMENT 2: Index funds are branded as passively managed because each has a
portfolio manager whose job is to replicate the index rather than select the assets purchased
or sold.
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15. STATEMENT 1: Investors with a more aggressive profile weight their portfolios toward
more volatile investments such as growth stocks.
STATEMENT 2: Investors with a conservative profile weight their portfolios toward
more stable investments such as bonds and blue-chip stocks.
16. It is the “sexy” portion of the financial statements.

A. Income Statement
B. Balance Sheet
C. Cash Flow Statement
D. Notes to the Financial Statements
17. STATEMENT 1: The goal of the DDM formula is to evaluate whether a stock is fairly
valued when its risk and the time value of money are compared to its expected return.
STATEMENT 2: CAPM attempts to calculate the fair value of a stock irrespective of the
prevailing market conditions and takes into consideration the dividend payout factors and
market expected returns.
A. Only statement 1 is true.

B. Only statement 2 is true.
C. Both statements are true.
D. Both statements are false.
18. _______ in the CAPM formula accounts for the time value of money.
A. Beta of a potential investment (β)
B. Expected return of investment (Eri)
C. Expected rate of return on the market E(Rm)
D. Risk-free rate (RFR)
19. Which of the following information is presented in most financial reports?

A. Auditor’s report telling you that the results are accurate
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B. Notes to the Financial Statements.

C. Letter to shareholders from the President or CEO
D. All of these
20. STATEMENT 1: Investors often overlook the balance sheet.

STATEMENT 2: Investors tend to focus more on earnings.
21. This includes a company’s obligation that will come due within the 12 months.
A. Current Assets
B. Current Liabilities
C. Long-term Liabilities
D. Stockholder’s Equity
22. When bonds are sold for higher than face value, the difference is called _________.
A. Bond premium
B. Bond discount
C. Bond yields
D. Bond values
23. Is defined as a certificate of indebtedness.

A. Bond
B. Promissory notes
C. Contract
D. License
24. Spreading risk and reward within an asset class.

A. Diversification
B. Rebalancing
C. Asset allocation
D. Portfolio management
25. STATEMENT 1: Indexing eliminates additional market risk.

STATEMENT 2: There is a possibility of human error in terms of stock selection.
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26. It involves attempting to beat the performance of an index by actively buying and selling
individual stocks and other assets.
A. Portfolio management
B. Passive management
C. Active management
D. Financial management
27. STATEMENT 1: Stock dividends of less than 20% are taken up market value.
STATEMENT 2: Stock dividends of 20% or more are taken up at par value.
28. Refers to a decrease in par value per share requiring the issuance of additional shares so
that the total par value of the contributed capital remains the same.
A. Stock splits
B. Retained earnings
C. Contributed capital
D. Stock dividend
29. Which of the following are types of relative valuation ratios?

A. Price to free cash flow
B. Enterprise value
C. Operating margin
D. All of these
30. _________ is based on the understanding that different types of assets do not move in
concert, and some are more volatile than others.
A. Portfolio management
B. Asset allocation
C. Rebalancing
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D. Diversification
31. States that share prices reflect all information and consistent alpha generation is impossible.
A. Index funds
B. Passive strategy portfolio
C. Efficient market hypothesis (EMH)
D. Management fees
32. STATEMENT 1: Managers, creditors, and investors all need to familiarize themselves
with the assets, liabilities, and equity of a company.
STATEMENT 2: The income statement is the place to find all this handy information.
33. The _____________ is a measure of how much risk the investment will add to a portfolio
that looks like the market.
A. Beta of a potential investment (β)
B. Expected return of investment (Eri)
C. Expected rate of return on the market E(Rm)
D. Risk-free rate (RFR)
34. It is a quantitative method used for predicting the price of a company’s stock based on the
theory that its present-day price is worth the sum of all its future dividend payments when
discounted back to their present value.
A. Relative valuation
B. Capital asset pricing model (CAPM)
C. Asset allocation
D. Dividend discount model (DDM)
35. STATEMENT 1: Internal constituents use FS to understand the overall health of an

organization as well as to evaluate financial performance.
STATEMENT 2: External stakeholders use FS as a monitoring tool for managing the
finances.
CAF Review

36. The excess of the purchase price over the fair market value of an asset.
A. Stockholders’ Equity
B. Goodwill
C. Sales
D. Current Assets
37. The final profit after deducting all expenses from revenue.
A. Net Income
B. Gross Margin
C. Net Income per share
D. Net Income before Interest and Tax
38. This is cash generated from day-to-day business operations.

A. Cash from Investing
B. Cash from Financing
C. Cash from Operations
D. None of these
39. Level of efficiency in which all historical information is reflected in the price.
A. Semi-strong form
B. Strong form
C. Semi-weak form
D. None of these
40. Main classification of bond liability according to maturity:

A. Straight, serial, convertible, conditional
B. Straight, callable, serial, floating
C. Callable, fixed, bearer, straight
D. Callable, convertible, serial, straight
41. The written agreement on bond issues between the issuing company and the bondholder.
A. Indenture
B. Bond liability
C. Promissory note
CAF Review
D. Contract
42. Assumes that a large number of profit maximizing participants analyze and value
securities.
A. Transparent
B. Liquid
C. Internal/ Information Efficiency
D. Efficiency
43. This type of footnote identifies and explains the major accounting policies of the business.
A. Disclosure
B. Accounting Methods
C. Ratio Analysis
D. None of these
44. Net income divided by total assets

A. Return on Sales
B. Return on Assets
C. Return on Equity
D. None of these
45. Uses important ratio metrics to calculate statistical relationships.

A. Horizontal Analysis
B. Vertical Analysis
C. Financial Analysis
D. None of these
46. Include everything from pension plan liabilities for existing employees to details about
ominous legal proceedings the company is involved in.
A. Disclosure
B. Portfolio
C. Accounting Methods
D. Ratio Analysis
47. Revenue minus Cost of Good Sold

A. Operating Expense
B. Gross Margin
CAF Review
C. Interest Expense
D. Net Income
48. Which of these is/are included in the Statement of Cash Flow?

I. Cash from Operations
II. Cash from Investing
III. Cash from Financing
IV. Net Increase or Decrease in Cash
A. I, II, III
B. I, III, IV
C. II, III, IV
D. I, II, III, IV
49. It is made across various classes of securities, sectors of the economy, and geographical
regions.
A. Real Diversification
B. Asset Allocation
C. Rebalancing
D. Diversification
50. It is an unconditional promise to pay a specified amount of money at a determinable future

date and to make periodic interest payments at a stated rate until the principal amount is
paid.
A. Indenture
B. Bond
C. Promissory note
D. Contract
51. ________ is the process of analyzing a company's financial statements for decision-making
purposes.
A. Ratio Analysis
B. Vertical Analysis
C. Financial Statement Analysis
D. Horizontal Analysis
52. A model in which it is a business valuation method that compares a company’s value to
that of its competitor or industry peers to assess the firm’s financial worth.
CAF Review
A. Relative valuation model

B. Capital asset pricing model
C. Dividend discount model
D. Absolute value model
53. STATEMENT 1: A corporation’s capital stock may be divided into two or more classes
to attract different kinds of investors.
STATEMENT 2: Stock dividends refers to earnings distribution in the form of shares of
capital stock.
54. Also known as Net Asset Value (NAV)
A. Book Value of Stocks
B. Stock Dividends
C. Stocks
D. Common stock equity
55. STATEMENT 1: The only certainty in investing is that it is impossible to consistently

predict winners and losers.
STATEMENT 2: The prudent approach is to create a basket of investments that provides
broad exposure within an asset class.
56. STATEMENT 1: P/E ratio is calculated as dividing earnings per share by stock price
STATEMENT 2: P/E ratio is expressed as a company’s share price as a multiple of its
earnings.
CAF Review
57. Reveals how the remainder of the company’s assets are financed, including common and
preferred stock, treasury stock, and retained earnings.
A. Current Liabilities
B. Current Assets
C. Goodwill
D. Stockholders’ Equity
58. Highlights the financial condition of a company at a single point in time.

A. Income statement
B. Cash flow statement
C. Balance sheet
D. Footnotes
59. STATEMENT 1: Increases in cash from previous year will be written normally.
STATEMENT 2: Decreases in cash are typically written in (brackets)
60. This is the process of determining the fair value of a financial asset.
A. Valuation
B. Allocation
C. Depreciation
D. Stock split
CAF Review
III. ANSWER KEY

True or False
1. F 6. F 11. T
2. T 7. T 12. F
3. F 8. T 13. T
4. T 9. F 14. T
5. T 10. T 15. F
Multiple Choice
1. B 21. B 41. A
2. C 22. A 42. C
3. D 23. A 43. B
4. D 24. A 44. B
5. C 25. A 45. D
6. A 26. C 46. A
7. B 27. C 47. B
8. A 28. A 48. D
9. C 29. D 49. A
10. A 30. B 50. B
11. C 31. C 51. C
12. D 32. A 52. A
13. A 33. A 53. C
14. B 34. D 54. A
15. B 35. D 55. C
16. A 36. B 56. B
17. D 37. A 57. D
18. D 38. C 58. C
19. D 39. D 59. C
20. C 40. D 60. A

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POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

College of Accountancy and Finance Student Council

II. MULTIPLE CHOICE

1. Which of these is NOT a key element of portfolio management:

3. Which of these is/are characteristics of a good market:

4. Which of these is/are components of bonds:

6. ___________ is commonly referred to as indexing or index investing.

8. ____________ aims to duplicate the return of a particular market index or benchmark

11. STATEMENT 1: Horizontal analysis compares data horizontally, by analyzing values of

D. Both statements are false

16. It is the “sexy” portion of the financial statements.

A. Only statement 1 is true.

19. Which of the following information is presented in most financial reports?

B. Notes to the Financial Statements.

20. STATEMENT 1: Investors often overlook the balance sheet.

23. Is defined as a certificate of indebtedness.

24. Spreading risk and reward within an asset class.

25. STATEMENT 1: Indexing eliminates additional market risk.

A. Only statement 1 is true.

29. Which of the following are types of relative valuation ratios?

35. STATEMENT 1: Internal constituents use FS to understand the overall health of an

C. Both statements are true.

38. This is cash generated from day-to-day business operations.

40. Main classification of bond liability according to maturity:

44. Net income divided by total assets

45. Uses important ratio metrics to calculate statistical relationships.

47. Revenue minus Cost of Good Sold

48. Which of these is/are included in the Statement of Cash Flow?

50. It is an unconditional promise to pay a specified amount of money at a determinable future

A. Relative valuation model

55. STATEMENT 1: The only certainty in investing is that it is impossible to consistently

58. Highlights the financial condition of a company at a single point in time.

III. ANSWER KEY

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